Avangrid, Inc. - puc.sd.gov · AGR’s majority owner is Iberdrola S.A. (ISA Baa1 stable). It owns an 81.5% stake in the company with the remaining 18.5% being held by the public.

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION5 July 2018

Update

RATINGS

Avangrid, Inc.Domicile Albany, New York,

United States

Long Term Rating Baa1

Type LT Issuer Rating - DomCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Lesley Ritter [email protected]

Dexter East +1.212.553.3260Associate [email protected]

Jim Hempstead [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Avangrid, Inc.Update to credit analysis

SummaryAvangrid’s (AGR) credit quality reflects the strength of its regulated utility subsidiaries thataccount for 65% of operating cash flow generation, the largely contracted nature of itsunregulated business, and its strong financial ratios with minimal holding company debt.Offsetting these positive attributes are our expectation that AGR’s holding company leveragewill gradually increase over time and result in weaker but still adequate financial ratios.

Exhibit 1

Historical CFO Pre-W/C, Total Debt and CFO Pre-W/C to Debt($MM)

1,517 1,452

1,865 1,756 1,870

3,807

6,538 6,526

7,6267,399

39.9%

22.2%

28.6%

23.0%

25.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Dec-14 Dec-15 Dec-16 Dec-17 LTM Mar-18

CFO Pre-W/C Total Debt CFO pre-WC / Debt

Source: Moody's Financial MetricsTM

Credit strengths

» Low business risk regulated utilities represent 65% of the company’s EBITDA

» Healthy financial ratios

» Diversified service territory

» Unregulated business is majority contracted with long-term agreements with credit-worthy counterparties

.,, Rate this Research

MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Credit challenges

» Sizeable capital expenditure plan across both the utility and renewable segment carries some execution risk

» Material weakness finding in audited financials point to corporate governance challenges

» Ring-fenced utilities create separateness and insulation from AGR family

Rating outlookAGR’s stable outlook reflects the strength of its regulated utility subsidiaries that account for 65% of operating cash flow generation,the largely contracted nature of its unregulated business, as well as access to incremental liquidity from a deep-pocketed majorityowner. The outlook also takes into account our expectation that its holding company leverage will gradually increase over time andresult in lower credit metrics that are more in line with its rating, such as cash flow from operations pre-working capital to debt (CFOpre-WC/D) in the high teens.

Factors that could lead to an upgrade

» Material improvement in the credit supportiveness of the regulatory frameworks within which AGR’s regulated utilities operate

» Sustained strong financial ratios such that CFO pre-WC/D exceeds 26%, on a sustainable basis

Factors that could lead to a downgrade

» A deterioration in the credit supportiveness of the regulatory jurisdiction across which AGR’s utilities operate

» A weakening in the company’s financial results, such that CFO pre-WC/D falls to the mid-teens and retained cash flow to debtdeclines to the low teens, on a sustained basis.

» An increase in the percentage of consolidated operating cash flows derived from the more volatile, non-contracted unregulatedsegment

» A material weakening in the credit quality of its majority owner, Iberdrola S.A., or increased dividend payments from AGR to itsshareholders.

Key indicators

Exhibit 2

Avangrid, Inc. Indicators [1]

Dec-14 Dec-15 Dec-16 Dec-17 LTM Mar-18

CFO pre-WC + Interest / Interest 6.9x 6.0x 6.6x 6.0x 6.2x

CFO pre-WC / Debt 39.9% 22.2% 28.6% 23.0% 25.3%

CFO pre-WC に Dｷ┗ｷSWﾐSゲ / Debt 39.8% 22.2% 22.4% 16.0% 17.9%

Debt / Capitalization 20.1% 26.3% 26.0% 31.6% 30.6%

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.


This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 5 July 2018 Avangrid, Inc.: Update to credit analysis


ProfileAGR is a diversified utility holding company with total assets of $31.5 billion (as of 3/31/18). The company’s regulated operationsaccount for roughly 65% of operating cash flows with its unregulated, but largely contracted operations, making up the difference.AGR’s majority owner is Iberdrola S.A. (ISA Baa1 stable). It owns an 81.5% stake in the company with the remaining 18.5% being heldby the public. ISA is a global diversified energy company with total assets of $128 billion as of 12/31/17. Its primary holdings are locatedin Spain, the United Kingdom, the United States, Mexico and Brazil.

Exhibit 3

Avangrid's geographic presence

Source: Company presentation


@ wind @ Solar

@ Thermal

@ Networks

AVANGRID -.. Operations

d Uarlers in Hea q Orange, CT

•


Detailed credit considerationsREGULATED UTILITIES PROVIDE FUNDAMENTAL CREDIT SUPPORTAGR’s ownership of eight low business risk regulated utilities, operating across four different states in the northeastern U.S., andrepresenting a total rate base of $9.1 billion, provide a strong, predictable, and stable base to the group’s overall operating cash flowgeneration. Together, these utilities represent about 65% of the company’s consolidated cash flow generation, and account for 80% ofconsolidated debt.

Exhibit 4

Source: Company presentation

AGR’s core utility holdings operate in mostly constructive regulatory environments. AGR’s New York and Maine-based transmissionand distribution (T&D) utilities as well as its FERC regulated transmission segment account for 77% of consolidated rate base, andbenefit from the most credit supportive regulatory environment of the consolidated group. Some of the favorable ratemakingmechanisms available in these jurisdictions are the application of a forward looking test year and formulaic equity returns. These allowfor transparent and predictable rate setting and for timely recovery of operating and capital costs.

AGR’s natural gas distribution companies (LDCs) account for 12% of consolidated rate base. They operate across the somewhat morechallenging but improving regulatory jurisdictions of Massachusetts and Connecticut. Although these companies have a history offully litigated rate cases, they have access to decoupling and infrastructure tracker mechanisms. Decoupling is credit positive since itsupports the stability of operating cash flow generation by shielding the companies from the demand volatility associated with weatherand customer demand. Similarly, the infrastructure tracker mechanisms are credit positive since they provide for assured recovery ofprudent reliability infrastructure spending on a timely basis.

From a credit perspective, AGR’s weakest and most challenged utility company is United Illuminating (UI, Baa1 stable), its Connecticutbased T&D company, that accounts for 11% of consolidated rate base (when excluding UI’s FERC regulated segment). Like its sistercompanies, it has access to the state’s decoupling mechanism but does not benefit from the reliability infrastructure rider available toConnecticut LDCs. Furthermore, the company has a history of experiencing more challenging general rate cases than its sister utilities,that, to date have only been resolved through a fully litigated process.


Electricity Service 2017

Electricity Customers 2,231 ,576

Miles of Transmission Lines 8,657

Miles of Distribution Lines 70,934

Substations 822

Electricity Delivered 38,349 GWh

Natural Gas Service

Natural Gas Customers 998,236

Miles of Transmission Pipeline 127

Miles of Distribution Pipeline 24,298

Natural Gas Delivered 175,477,000 DTh


HISTORICALLY STRONG FINANCIAL RATIOS BUOYED BY LOW DEBT LEVELS AT PARENT AND UNREGULATEDSUBSIDIARY WILL WEAKEN OVER TIMEAbout 80% of the company’s consolidated debt is at the company’s regulated utilities, that are levered in accordance with theirregulatory capital structure of between 40%-45%. The remaining 20% of the debt relates to a limited amount of project financedebt at its unregulated subsidiaries as well as $1.05 billion of debt at the parent (up from $600 million a year ago). The relativelylow amount of debt at these entities, as well as the healthy operating cash flow generation from the unregulated segment’s 6.5 GWportfolio of largely contracted wind farms, results in strong debt coverage and debt to capitalization ratios.

Going forward, we anticipate that the company will continue to gradually increase the leverage at its holding company. AGR istargeting a dividend payout ratio of 65-75% at a time when it is stepping up capex across its largest operating utility and unregulatedsubsidiaries, and generating lower operating cash flows due to the passage of federal tax reform.

AGR's operating cash flows are forecasted to fund about 80% of its capital investments, with the balance coming from incrementaldebt at the parent and the utilities, and tax equity at the company's unregulated segment. AGR will also rely on incremental parentdebt issuance to fund its dividend. Although not a sustainable long-term approach, with a CFO pre-WC/D of about 23% and debtto capitalization of around 32%, there is some room for incremental leverage, assuming its business mix remains unchanged and itcontinues to benefit from constructive regulatory relationships across the jurisdictions where it operates.

LARGELY CONTRACTED NATURE OF RENEWABLE ASSETS AND SALE OF NATURAL GAS BUSINESS IMPROVEUNREGULATED SEGMENT’S RISK PROFILEFollowing the sale of its natural gas trading and storage business, AGR’s unregulated business, Avangrid Renewables Holdings, Inc.(Renewables), now solely consists of 7.1 GW of generation capacity, with largely contracted renewable sources accounting for 6.5 GWof the total. Importantly, prior to the sale of its natural gas business, Renewables already accounted for 100% of the segment’s EBITDAand has a record of producing generally stable operating cash flows. About seventy percent of AGR's generation capacity is contractedunder long-term power purchase agreements with an average life of 9 years to credit-worthy offtakers, while 5% to 15% of the balanceis hedged.

In 2017, AGR's management announced its plan to exit the natural gas business as it viewed it as non-core and not aligned with thebroader company's strategic objectives. Furthermore, as a minor cash flow contributor, generating only about 5% of the company'sconsolidated cash flow in 2017, it carried materially more business risk than AGR's other segments. On 1 March 2018, AGR closed atransaction to sell Enstor Energy Services, LLC, AGR’s gas trading business to CCI US Asset holdings LLC near fair market value ($66million subject to working capital, cash and other adjustments). On 1 May 2018, AGR closed a transaction to sell Enstor Gas LLC, its gasstorage business, to Amphora Gas Storage, LLC for $66 million subject to working capital, cash and other adjustments. The transactionprice was lower than the estimated fair market value of the business by approximately $9 million.

MATERIAL WEAKNESS FINDING IN AUDITED STATEMENTS POINTS TO CORPORATE GOVERNANCE CHALLENGESOn 26 March 2018, AGR released its 2017 10-K which included disclosure of a material weakness in an adverse auditor opinion onthe effectiveness of the company's internal control over financial reporting, a significant credit negative. Although AGR's 10-K auditwas unqualified and required no financial statement restatement, the existence of a material weakness for the second consecutiveyear demonstrates an inability of AGR's board and management to effectively implement certain specific, satisfactory internal controlprocesses that are standard practice among industry peers.

The 2017 material weakness relates to internal controls over the measurement and disclosure of income taxes. This is an issue initiallydisclosed in AGR's 2016 10-K and highlighted as one of three material weaknesses at that time. While the other two weaknesseswere addressed over the course of 2017, AGR failed to fully remediate the inadequate internal control processes and proceduressurrounding measurement and disclosure of income taxes prior to their 2017 audit. The company expects to address the issue throughacceleration of the deadline of key activities, increasing its capabilities in the area of income tax accounting resources, and enhancingthe automation of income tax processes and controls to allow for more timely completion of enhanced review of internal controls.AGR currently anticipates that all remediation efforts will be completed by 31 December 2018. See Moody's Issuer Comment entitled“Avangrid discloses existence of a “material weakness” in its 10-K for second year in a row, a credit negative” for more details on thematter.



LINK BETWEEN AGR’S CREDIT AND ISA SOFTENS FOLLOWING ITS LISTING ON THE NYSEThe decision to list AGR on the New York Stock exchange and effectively reduce ISA’s ownership of the company by roughly 20% inDecember 2015, leads Moody’s to conclude that the historically tight linkage between both companies has softened. Although weacknowledge that AGR is an important component of ISA’s overall growth strategy, we believe that AGR is largely run independently.We expect that the company will continue to raise the bulk of its debt through the US capital markets, as well as seek to leverage itslisting on the NYSE to raise equity for opportunistic growth potentially diluting ISA’s ownership further.

Additionally, the presence of ring fencing provisions at all of its utilities limit ISA’s flexibility with regards to its ability to drawdistributions from those entities. Furthermore, AGR’s decision to refinance the legacy UIL Holding company debt at AGR rather than atISA is additional evidence of a de-linking of the two companies. That said, we continue to acknowledge that the majority ownership byISA remains a credit positive, particularly since it provides an additional venue to access liquidity at an advantageous price.

Liquidity analysisAGR’s maintains good access to liquidity. AGR had $40 million of cash on the balance sheet as of 31 March 2018 and maintains a five-year bank credit facility with an aggregate borrowing limit of $2.5 billion (increased from $1.5 billion on 29 June, 2018). The bank creditfacility, that among other things serves to backstop AGR’s $1 billion commercial paper program, has a termination date of June 2023,does not include an ongoing material adverse change clause, and the only financial covenant is a maximum allowed debt to capitalratio of 65% that AGR comfortably satisfied as of 31 March 2018. As part of the recent upsizing and extension of the bank facility,AGR added a sustainability-linked pricing metric that permits an interest rate reduction for meeting targets related to environmentalsustainability and highlights AGR's commitment to enhancing its environmentally friendly business profile.

The consolidated group had $869 million of availability under the then $1.5 billion bank credit facility as of 31 March 2018 after givingeffect to $631 million of commercial paper outstanding. AGR’s utility subsidiaries have various debt maturities totaling $491 millioncoming due in 2018 and 2019. The next AGR level maturity is scheduled for 2020 when $450 million of senior unsecured notes aredue.

AGR employs a centralized approach to managing its liquidity. To the extent possible given certain regulatory restrictions, AGRconcentrate its cash at the holding company and primarily conducts its short-term borrowings through AGR. The utilities optimize theircash balances through a virtual money pool arrangement. Under the terms of this agreement utilities may lend to each other but notto their unregulated affiliates or parent. These terms meet a regulatory requirement set at the time of AGR’s acquisition of the utilitycompanies which prohibits utilities from lending to unregulated affiliates, including AGR.

Aside from modest cash balances, AGR’s principal source of liquidity are its commercial paper program and its bank credit facility underwhich it may borrow up to $2 billion. AGR also recently entered into a $500 million inter-group credit agreement with ISA. The inter-group credit agreement has the same financial covenant as the one listed in the bank facility, and terminates the earlier of 28 June2023 or the date when ISA ceases to own at least 50% of AGR's outstanding common stock. Proceeds from the inter-group creditfacility are used to provide credit support to AGR's CP program and for general corporate purposes.

AGR is also party to a notional cash pooling arrangement along with other ISA subsidiaries. Parties to the agreement may deposit fundswith or borrow from the pool, provided that the net balance of funds deposited or borrowed by all pool participants in the aggregateis not less than zero. This agreement provides AGR yet another avenue for liquidity, supplementing its access to the bank market, anddebt and equity capital markets.

For LTM 31 March 2018, AGR generated $1.9 billion in cash flow from operations, invested $2.3 billion in capital expenditures, andmade $535 million in dividend payments to its shareholders, yielding a $906 million negative free cash flow balance was financed with$585 million of incremental long-term debt and short term debt. Over the next 12 to 18 months, we anticipate that the company willremain free cash flow negative and will finance the shortfall through incremental debt.



Rating methodology and scorecard factors

Exhibit 5

Rating Factors

Avangrid, Inc.

Regulated Electric and Gas Utilities Industry Grid [1][2]

Factor 1 : Regulatory Framework (25%) Measure Score Measure Score

a) Legislative and Judicial Underpinnings of the Regulatory Framework A A A A

b) Consistency and Predictability of Regulation A A A A

Factor 2 : Ability to Recover Costs and Earn Returns (25%)

a) Timeliness of Recovery of Operating and Capital Costs Baa Baa Baa Baa

b) Sufficiency of Rates and Returns Baa Baa Baa Baa

Factor 3 : Diversification (10%)

a) Market Position Aa Aa Aa Aa

b) Generation and Fuel Diversity A A A A

Factor 4 : Financial Strength (40%)

a) CFO pre-WC + Interest / Interest (3 Year Avg) 6.5x Aa 5.5x - 6x A

b) CFO pre-WC / Debt (3 Year Avg) 26.1% A 19% - 24% Baa

c) CFO pre-WC – Dividends / Debt (3 Year Avg) 18.5% A 15% - 19% A

d) Debt / Capitalization (3 Year Avg) 28.5% Aa 30% - 35% Aa

Rating:

Grid-Indicated Rating Before Notching Adjustment A2 A3

HoldCo Structural Subordination Notching -1 -1 -1 -1

a) Indicated Rating from Grid A3 Baa1

b) Actual Rating Assigned Baa1 Baa1

Moody's 12-18 Month

Forward View

As of Date Published [3]

Current

LTM 3/31/2018

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 3/31/2018(L)[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.




Appendix

Exhibit 6

Cash Flow and Credit Measures [1]($MM)

CF Metrics 2012 2014 2015 2016 2017

As Adjusted

EBITDA 928 1695 1402 2220 2012

FFO 697 1,343 1,236 1,884 1,741

- Div 2 3 3 401 535

RCF 695 1,340 1,233 1,483 1,206

FFO 697 1,343 1,236 1,884 1,741

+/- ǻWC 108 (144) (58) (271) 31

+/- Other (74) 174 216 (19) 15

CFO 730 1,373 1,394 1,594 1,787

- Div 2 3 3 401 535

- Capex 1,035 1,023 1,058 1,671 2,383

FCF (307) 347 333 (478) (1,131)

Debt / EBITDA 4.0x 2.2x 4.7x 2.9x 3.8x

EBITDA / Interest 3.7x 6.4x 4.8x 6.7x 5.7x

FFO / Debt 18.8% 35.3% 18.9% 28.9% 22.8%

RCF / Debt 18.8% 35.2% 18.9% 22.7% 15.8%

[1] All figures and ratios are calculated using Moody’s estimates and standard adjustments. Periods are Financial Year-End unless indicated. LTM = Last Twelve Months.


Exhibit 7

Peer Comparison [1]($MM)

FYE FYE LTM FYE FYE LTM FYE FYE FYE FYE FYE LTM

(in US millions) Dec-16 Dec-17 Mar-18 Dec-16 Dec-17 Mar-18 Dec-15 Dec-16 Dec-17 Dec-16 Dec-17 Mar-18

Revenue 6,018 5,963 6,070 16,155 17,195 17,086 11,683 11,737 12,586 11,107 11,404 11,409

EBITDA 2,220 2,012 1,998 8,341 7,983 8,049 5,418 5,687 6,479 3,829 4,008 4,018

CFO pre-WC / Debt 28.6% 23.0% 25.3% 21.5% 21.5% 24.5% 14.8% 11.0% 12.1% 19.8% 19.6% 19.7%

CFO pre-WC に Dｷ┗ｷSWﾐSゲ / Debt 22.4% 16.0% 17.9% 15.9% 15.9% 18.1% 9.6% 6.1% 7.0% 15.6% 15.3% 15.4%

Debt / EBITDA 2.9x 3.8x 3.7x 3.7x 4.3x 3.9x 5.5x 6.4x 6.0x 4.2x 4.2x 4.2x

Debt / Capitalization 26.0% 31.6% 30.6% 45.5% 49.3% 42.2% 57.9% 58.0% 61.1% 47.6% 52.8% 52.4%

EBITDA / Interest Expense 6.7x 5.7x 5.6x 7.1x 4.9x 5.5x 5.2x 4.8x 4.4x 5.9x 5.8x 5.8x

Baa1 Stable (P)Baa1 Stable Baa2 Negative A3 Stable

Avangrid, Inc. NextEra Energy, Inc. Dominion Energy, Inc. Xcel Energy Inc.

[1] All figures & ratios calculated using Moody’s estimates & standard adjustments. FYE = Financial Year-End. LTM = Last Twelve Months. RUR* = Ratings under Review, where UPG = forupgrade and DNG = for downgrade.




Ratings

Exhibit 8Category Moody's RatingAVANGRID, INC.

Outlook StableIssuer Rating Baa1Senior Unsecured Baa1Commercial Paper P-2

PARENT: IBERDROLA S.A.

Outlook StableIssuer Rating Baa1Senior Unsecured MTN -Dom Curr (P)Baa1ST Issuer Rating P-2

AVANGRID RENEWABLES HOLDINGS, INC.

Outlook StableBkd Issuer Rating Baa1

BERKSHIRE GAS COMPANY

Outlook PositiveIssuer Rating A3

UNITED ILLUMINATING COMPANY

Outlook StableIssuer Rating Baa1Bkd LT IRB/PC Baa1

ROCHESTER GAS & ELECTRIC CORPORATION

Outlook StableIssuer Rating A3Bkd LT IRB/PC A3Senior Secured A1

NEW YORK STATE ELECTRIC AND GASCORPORATION

Outlook StableIssuer Rating A3Bkd LT IRB/PC A3Senior Secured A3Senior Unsecured A3

CENTRAL MAINE POWER COMPANY

Outlook StableIssuer Rating A2Senior Unsecured A2Pref. Stock Baa1

SOUTHERN CONNECTICUT GAS COMPANY

Outlook StableIssuer Rating A3Senior Secured A1

CONNECTICUT NATURAL GAS CORPORATION

Outlook StableSenior Unsecured A3

Source: Moody's Investors Service



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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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Avangrid, Inc. - puc.sd.gov · AGR’s majority owner is Iberdrola S.A. (ISA Baa1 stable). It owns an 81.5% stake in the company with the remaining 18.5% being held by the public.

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